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Thursday, January 8, 2015

EU Showdown: Greece Takes on the Vampire Squid

Greece and the troika (the International Monetary Fund, the EU,
and the European Central Bank) are in a dangerous game of chicken. The
Greeks have been threatened with a “Cyprus-Style prolonged bank holiday” if they “vote wrong.” But they have been bullied for too long and are saying “no more.”
A return to the polls was triggered in December, when the Parliament
rejected Prime Minister Antonis Samaras’ pro-austerity candidate for
president. In a general election, now set for January 25th,
the EU-skeptic, anti-austerity, leftist Syriza party is likely to
prevail. Syriza captured a 3% lead in the polls following mass public
discontent over the harsh austerity measures Athens was forced to accept
in return for a €240 billion bailout.

Austerity has plunged the economy into conditions worse than in the Great Depression. As Professor Bill Black observes, the question is not why the Greek people are rising up to reject the barbarous measures but what took them so long.

Ireland was similarly forced into an EU bailout with painful
austerity measures attached. A series of letters has recently come to
light showing that the Irish government was effectively blackmailed into
it, with the threat that the ECB would otherwise cut off liquidity
funding to Ireland’s banks. The same sort of threat has been leveled at
the Greeks, but this time they are not taking the bait.Squeezed by the Squid

The first thing you need to know about Goldman Sachs is that it’s
everywhere. The world’s most powerful investment bank is a great vampire
squid wrapped around the face of humanity, relentlessly jamming its
blood funnel into anything that smells like money. In fact, the history
of the recent financial crisis, which doubles as a history of the rapid
decline and fall of the suddenly swindled dry American empire, reads
like a Who’s Who of Goldman Sachs graduates.

Goldman has spawned an unusual number of EU and US officials with
dictatorial power to promote and protect big-bank interests. They
include US Treasury Secretary Robert Rubin, who brokered the repeal of
the Glass-Steagall Act in 1999 and passage of the Commodity Futures
Modernization Act in 2000; Treasury Secretary Henry Paulson, who
presided over the 2008 Wall Street bailout; Mario Draghi, current head
of the European Central Bank; Mario Monti, who led a government of
technocrats as Italian prime minister; and Bank of England Governor Mark
Carney, chair of the Financial Stability Board that sets financial
regulations for the G20 countries.

Goldman’s role in the Greek crisis goes back to 2001. The vampire
squid, smelling money in Greece’s debt problems, jabbed its blood funnel
into Greek fiscal management, sucking out high fees to hide the extent
of Greece’s debt in complicated derivatives. The squid then hedged its
bets by shorting Greek debt. Bearish bets on Greek debt launched by heavyweight hedge funds in
late 2009 put selling pressure on the euro, forcing Greece into the
bailout and austerity measures that have since destroyed its economy.
Before the December 2014 parliamentary vote that brought down the
Greek government, Goldman repeated the power play that has long held the
eurozone in thrall to an unelected banking elite. In a note titled “From GRecovery to GRelapse,”
reprinted on Zerohedge, it warned that “the room for Greece to
meaningfully backtrack from the reforms that have already been
implemented is very limited.”
Why? Because bank “liquidity” could be cut in the event of “a severe
clash between Greece and international lenders.” The central bank could
cut liquidity or not, at its whim; and without it, the banks would be
insolvent.
As the late Murray Rothbard pointed out, all banks are technically
insolvent. They all lend money they don’t have. They rely on being able
to borrow from other banks, the money market, or the central bank as
needed to balance their books. The central bank, which has the power to
print money, is the ultimate backstop in this sleight of hand and is
therefore in the driver’s seat. If that source of liquidity dries up,
the banks go down.
The Goldman memo warned:

The Biggest Risk is an Interruption of the Funding of Greek Banks by The ECB.
Pressing as the government refinancing schedule may look on the
surface, it is unlikely to become a real issue as long as the ECB stands
behind the Greek banking system. . . .
But herein lies the main risk for Greece. The economy needs the only lender of last resort to the banking system to maintain ample provision of liquidity. And
this is not just because banks may require resources to help reduce
future refinancing risks for the sovereign. But also because banks
are already reliant on government issued or government guaranteed
securities to maintain the current levels of liquidity constant. . . .
In the event of a severe Greek government clash with international lenders, interruption
of liquidity provision to Greek banks by the ECB could potentially even
lead to a Cyprus-style prolonged “bank holiday”. And market fears for potential Euro-exit risks could rise at that point. [Emphasis added.]

The condition of the Greek banks was not the issue. The gun being
held to the banks’ heads was the threat that the central bank’s critical
credit line could be cut unless financial “reforms” were complied with.
Indeed, any country that resists going along with the program could
find that its banks have been cut off from that critical liquidity.
That is actually what happened in Cyprus in 2013. The banks declared insolvent had passed the latest round of ECB stress tests and
were no less salvageable than many other banks – until the troika
demanded an additional €600 billion to maintain the central bank’s
credit line.
That was the threat leveled at the Irish government before it agreed
to a bailout with strings attached, and it was the threat aimed in
December at Greece. Greek Finance Minister Gikas Hardouvelis stated in
an interview:

The key to . . . our economy’s future in 2015 and later is held by
the European Central Bank. . . . This key can easily and abruptly be
used to block funding to banks and therefore strangle the Greek economy
in no time at all.

Europe’s Lehman Moment?
That was the threat, but as noted on Zerohedge, the ECB’s hands may be tied in this case:

[S]hould Greece decide to default it would mean those several hundred
billion Greek bonds currently held in official accounts would go from
par to worthless overnight, leading to massive unaccounted for
impairments on Europe’s pristine balance sheets, which also confirms
that Greece once again has all the negotiating leverage.

Despite that risk, on January 3rdDer Spiegel reported that
the German government believes the Eurozone would now be able to cope
with a Greek exit from the euro. The risk of “contagion” is now limited
because major banks are protected by the new European Banking Union.
The banks are protected but the depositors may not be. Under the new “bail-in” rules imposed by the Financial Stability Board, confirmed in the European Banking Union agreed
to last spring, any EU government bailout must be preceded by the
bail-in (confiscation) of creditor funds, including depositor funds. As
in Cyprus, it could be the depositors, not the banks, picking up the
tab.
What about deposit insurance? That was supposed to be the third
pillar of the Banking Union, but a eurozone-wide insurance scheme was
never agreed to. That means depositors will be left to the resources of
their bankrupt local government, which are liable to be sparse.
What the bail-in protocol does guarantee are the derivatives bets of
Goldman and other international megabanks. In a May 2013 article in Forbes titled “The Cyprus Bank ‘Bail-In’ Is Another Crony Bankster Scam,” Nathan Lewis laid the scheme bare:

At first glance, the “bail-in” resembles the normal capitalist
process of liabilities restructuring that should occur when a bank
becomes insolvent. . . .
The difference with the “bail-in” is that the order of creditor
seniority is changed. In the end, it amounts to the cronies (other banks
and government) and non-cronies. The cronies get 100% or more; the
non-cronies, including non-interest-bearing depositors who should be
super-senior, get a kick in the guts instead. . . .
In principle, depositors are the most senior creditors in a bank.
However, that was changed in the 2005 bankruptcy law, which made
derivatives liabilities most senior. In other words, derivatives
liabilities get paid before all other creditors — certainly before
non-crony creditors like depositors. Considering the extreme levels of
derivatives liabilities that many large banks have, and the opportunity
to stuff any bank with derivatives liabilities in the last moment, other
creditors could easily find there is nothing left for them at all.

Even in the worst of the Great Depression bank bankruptcies, said
Lewis, creditors eventually recovered nearly all of their money. He
concluded:

When super-senior depositors have huge losses of 50% or more, after a
“bail-in” restructuring, you know that a crime was committed.

Goodbye Euro?
Greece can regain its sovereignty by defaulting on its debt,
abandoning the ECB and the euro, and issuing its own national currency
(the drachma) through its own central bank. But that would destabilize
the eurozone and might end in its breakup.
Will the troika take that risk? 2015 is shaping up to be an interesting year.